Tuesday, January 31, 2017

When I look at all I've written--over 4500 posts on TraderFeed and four trading books--I realize there's a lot of material out there. So I've decided to make one of my next projects a pulling together of all this information into a single user-friendly guide.

TraderFeed will be on sabbatical while I assemble the guide. I'll still post tweets about life and markets and link worthwhile posts.

Best of luck in your trading. I think you'll find the guide innovative and worthwhile--

As the saying goes, the risk is not in setting your sights too high and falling short. The risk is setting your sights too low and succeeding.In this post, Bella makes the important point that failure is an essential part of success. When we discover the trading that works for us, we'll discover many approaches to trading that don't work for us. Those will be "failures", but there will be important information in those failures. The key is to fail in planned ways, with modest risk taking. You can't find your success if you blow through your trading capital. Developing as a trader is all about controlled failure and learning from what works and doesn't work.This applies to life overall. What in your life, right here and now, are you trying to accomplish that is truly remarkable? What are you undertaking that is so important to you--so meaningful--that you're willing to try, fail, and keep trying? Learning by trial and error and deliberate practice can be a tiring slog...it's the remarkable aspect of what we undertake that inspires us and gives us a sense of drive and purpose. Few of us will push ourselves on the nitty gritty of day to day goals if we're not pulled by an exciting vision. What keeps the athlete in the gym each day is the quest for the Olympics; what keeps the entrepreneur working 15+ hours a day is the vision of seeing a great idea come to life.

Daily goals channel our efforts. Life goals inspire our efforts. We best navigate the path to success if we travel it with vision.Further Reading: Boosting Our Energy Level
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Monday, January 30, 2017

I strongly encourage you to check out this month's Forbes article and its links, which show how much change we're capable of and how we can make those changes.The change process is remarkably similar, regardless of the specific approaches being used. We first identify the recurring patterns in our lives that account for our success; then we engage in emotionally impactful experiences that change the old patterns and introduce new, positive ones; then we find repeated and creative ways to build those new patterns until they fully become a part of us.The research summarized in the article strongly suggests that structuring this process in a helping relationship accelerates change and increases the probability of sustaining changes. That helping relationship can be a coaching one, as in sports. It can be a counseling relationship in a school setting, or it can be a therapeutic relationship for life and relationship changes. It can be a mentoring relationship at work.

Think of a personal trainer in a gym. They will correct the exercises you are doing and introduce new ones. They will help you sustain effort even when you lose momentum. Over the course of your gym work you don't just improve your exercising. You become a stronger person, someone more fit, someone who feels better about themselves.This is the big takeaway: In changing our patterns, we open the door to more profound changes. You don't necessarily need a dedicated trading coach, but you also don't have to go it on your own. The right counselor, therapist, or mentor acts as a catalyst for change. As the research linked below suggests, having someone as a change agent enables us to make many years' worth of changes in a matter of months.We make the changes that will change our trading by finding the people who see the best in us and help us realize that potential.

Sunday, January 29, 2017

We are wired to make sense of our experience. We look for reasons that events occur, developing explanations that make the world understandable for us.Imagine that the same event occurs for two people: They lose their job.The first person blames the job loss on his bad luck, lamenting that nothing goes right in his life. He tells himself that he lost his previous position and this job loss will be just as devastating for his future. He views future career opportunities as equally insurmountable, doubting his vocational future.The second person sees the job loss as an unfortunate byproduct of the company's retrenchment in a weak economy. She tells herself that this won't be the case in all industries and that the economy will soon improve. She sees the weakness in the industry she had been working in and considers applying her skills to a different industry with greater growth prospects.The first person has an explanatory style that is internal (self-focused), stable (situation not amenable to change), and global (apt to occur in all situations). That explanatory style easily leads to a pessimistic, depressed mood.The second person has an explanatory style that is external (situationally focused), unstable (situations can change), and specific (unique to this particular occurrence). That explanatory style easily leads to a more optimistic, energized mood.The first person's explanatory style leads to blame; the second's style leads to adaptation. The first style is disempowering; the second is empowering. If I have an external, stable, global perception that markets are manipulated by shadowy forces beyond my control, I will not feel competent to succeed. If I have an internal, unstable, situational perception that markets offer different opportunities at different times and that I can adjust to detect patterns in various regimes, I will feel in control of my success. The term explanatory style suggests that each of us develops a characteristic way of viewing self and world. Sometimes we can impose that style onto events inaccurately, coloring our perceptions and reactions. Pessimistic explanatory styles tend to rob us of energy; optimistic styles tend to energize us.How we talk to ourselves after successes and failures colors our emotional reactions to those market outcomes. Many times traders can oscillate wildly from overly optimistic explanations ("I've finally figured these markets out!") to overly pessimistic ones ("I'll never be able to succeed."). That instability makes it difficult to sustain a consistent quality of preparation and effort. On other occasions, traders will pass off failure as a function of bad luck and "algos", thus preventing themselves from truly learning from their experience. The perfectionistic trader implicitly assumes all trades should be successful, thereby experiencing random, expectable losses as failures. That takes a heavy toll on morale.How do you explain your outcomes in markets? How do your explanations impact how you subsequently think and feel? How you learn? If you review your trading journal entries and reflect on your self-talk, you can identify your own explanatory styles and how they might be impacting your experience during and between market hours.Further Reading: We Gravitate Toward Our Self-Talk
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Saturday, January 28, 2017

In the most recent post, we looked at three questions that every trader needs to ask themselves to ensure that they are making the most of their work--and their personal life. The key idea is that peak performance requires something more than simply correcting our mistakes and minimizing our weaknesses. To be at our best--at work, in relationships--we must play to our strengths and find outlets for our virtues.

But if we've been problem focused, how can we look at ourselves afresh and identify our greatest strengths and virtues?

Here is a simple but powerful exercise in self-discovery:

Write down 10 of the happiest, most fulfilling, and most satisfying events of your life to date. These can be drawn from your work, your relationships, your personal interests, your past, or your more recent experience. The list should capture the true highlights of your life: meaningful experiences, rewarding accomplishments, positive and memorable occasions.

Once you have generated the list of 10, next to each one write down the strengths associated with each from the list of 24 below. Each experience may encompass more than one strength.

1) Zest - approaching life with a high degree of energy and enthusiasm;2) Grit - persistence in the face of challenge3) Self Control - displaying unusual discipline and self mastery4) Social Intelligence - displaying particular sensitivity to the needs and feelings of self and others 5) Gratitude - being thankful for what you have6) Love - being close to others7) Hope - having optimism about the future and working toward it8) Humor - being able to laugh and enjoy oneself9) Creativity - generating new and valuable ways to think about and do things10) Curiosity - being interested in something for its own sake and delving into it11) Open Mindedness - approaching experience in an accepting way, viewing it from all sides12) Love of Learning - mastering a new area of knowledge or skill13) Wisdom - providing deep and valuable perspective to others14) Bravery - standing up for what is right, willingness to face threats15) Integrity - speaking up for and acting upon your values16) Kindness - doing good things for others and caring for them17) Citizenship - working effectively as part of a team or community18) Fairness - treating others equally19) Leadership - providing direction and support for a group to which you belong20) Forgiveness - accepting the shortcomings of others and forgiving their wrongdoings21) Modesty - allowing one's actions to speak for themselves without self-aggrandizement22) Prudence - exercising restraint and discretion about one's choices without taking undue risks23) Appreciation of Beauty - noticing and valuing beauty and excellence24) Spirituality - holding and acting upon beliefs about higher purpose and meaning in lifeFor some of your top ten life experiences, multiple strengths will be apparent. Others may dominantly tap one or two strengths. As you survey the strengths attached to each of your peak life experiences, be particularly attentive to the items that recur. These are your signature strengths--the ones most consistently associated with your happiness, success, and fulfillment.Once you've identified your core strengths, you can then ask yourself:

* How consistently am I tapping into these strengths in my work?

* How consistently am I tapping into these strengths in my trading?

* How consistently do my relationships tap into these strengths?

* How many of my top strengths find an active outlet each week in my life?

It is not uncommon that people find that they are spending a relatively small proportion of their time activating the virtues and strengths that have provided them with their best life experiences. That is an important reason why so many people feel disengaged at work; why so many friendships and romantic relationships become stale; and why our trading fails to get to that next level.Sometimes the answer is to approach work, relationships, and trading differently--in ways that better play to our strengths.Sometimes the answer is to rethink our work, relationships, and trading altogether.We spend a great deal of time climbing the ladder of success. Make sure that ladder is leaning against the right building.Further Reading: Positive Psychology and Trading Psychology Podcast
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Friday, January 27, 2017

Much of trading psychology, like much of traditional applied psychology, is problem-focused. We start with a problem and we look to identify and remove or minimize the cause of the problem. This is similar to the framework in medicine. We start with symptoms, diagnose an illness, and seek a treatment that will cure the disease.What if, however, our periods of less than peak functioning are not simply the result of the presence of problems, but rather the relative absence of strengths and positive factors? Positive psychology has identified a number of virtues and strengths that describe our core passions: six core virtues and 24 strengths cutting across these. Perhaps we fall short, not because we are beset with problems, but because we fail to consistently tap into the qualities that generate our deepest fulfillment. In medicine, this is the equivalent of a wellness approach: maximizing health through proper nutrition, physical activity, and and self care rather than through medications and treatments.From the positive psychology perspective, no questions can be more important than the following:

When you are trading, are you consistently doing the things that bring you the greatest happiness and fulfillment in life?

When you are not trading, in your personal life, are you consistently doing the things that maximize your joy, life satisfaction, energy, and connections with others?

Perhaps trying to solve your problems is taking you further from your answers. Perhaps you are falling short of your potential because you are not consistently tapping into the strengths and passions that bring out the best in you. In my next post, we'll explore an exercise designed to assess where you stand relative to your greatest virtues and strengths.Further Reading: Finding Your Trading Talent
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Thursday, January 26, 2017

I had an interesting incident over the weekend. I was getting some writing done at a restaurant and was sitting at a window seat overlooking the parking lot. There, in front of my vision, was my car. I was suddenly filled with a feeling of appreciation. I've had that car for over 10 years. If I could drive it forever, I would do so gladly. So many people want to trade in a car every few years and drive something new. That desire never enters my mind.It made me think of appreciation in general. Sometimes I look at family photos and I have the same feelings. It really feels like family. When I see my cats playing--knowing the hardships from which they had been rescued--I am filled with a deep, inner satisfaction.Life is good.And yet on any given day or week, there are things in life that aren't so good. Frustration is a state in which we become so focused on what is missing in life that we cannot appreciate what we have. It is difficult to be frustrated and bitter if we feel gratitude for even the small things in life, like a red car or an affectionate cat.A while back I wrote about watching a trader trade at my Chicago firm. He stopped out of a losing trade and immediately flipped the other way based on a shift in order flow. He briefly turned to me, smiled, and said, "I just paid for information." His losing trade told him that the balance of longs and shorts in the market had changed. Instead of feeling frustration over the loser, he viewed it as a valuable piece of data and went on to make much more money in the flipped trade.How would our trading psychology benefit if we could derive information from all our losses and experience gratitude for our learning curves?Further Reading: Gratitude and Our Attitude
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Wednesday, January 25, 2017

Let's start with a moment of review:The NYSE TICK ($TICK) is the number of stocks trading on upticks minus the number trading on downticks on a high frequency basis. (It's updated about every second on my platform). It's a sensitive measure of market strength and weakness, because it captures the balance between stocks trading strongly (on upticks) or weakly (on downticks) throughout the day. Very often we'll see diminished buying ahead of market tops and vice versa--a useful heads up.Another way of looking at the data is to keep a running total of upticks vs. downticks through the day, similar to an advance/decline line. So we're adding the $TICK readings over time and observing changes in buying and selling from the direction and slope of the resulting line. Above we can see the Cumulative TICK line for yesterday, January 24, 2017. Notice how, early in the session, we started with buying interest and steadily moved higher through the day. In other words, buying interest was dominating selling interest right out of the gate. Seeing that lopsided demand/supply situation provides us with useful information to ensure we stay on the right side of the market.Our job as traders is to read market patterns and make decisions accordingly. Our job is not to impose our frameworks on markets and trade in ways that fit our theories (and that will make us look smart). Are you following the market, or are you expecting the market to follow you? Very often, that's the difference between successful and unsuccessful trading.Further Reading: Tracking the Market with US TICK
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Tuesday, January 24, 2017

Markets are stable and markets are changeable. What makes markets challenging to trade is that periods of stability, whether they be trends or ranges, give way to shifting periods and vice versa. Nothing can be quite so painful as becoming anchored in a stable regime and miss the signs that the market is changing. Similarly, it can be enormously frustrating to anticipate one change after another, only to return to the same old range and regime.For me, two of the most crucial variables for understanding a market are volumes traded and the standard deviation of price changes. Volume tells us who is in the market. A significant shift in volume generally denotes a significant change in the proportion of value and momentum players relative to the number of short-term participants and liquidity providers. Such shifts create changes in market direction. Very often, they also create changes in volatility: the standard deviation of price changes. If, over a lookback period, markets are trading with stable volume and volatility, it's a pretty good bet that markets will continue doing what they've been doing. Reverse engineering the successful trading patterns from the recent, stable past is a good start to finding winning trading strategies for the immediate future.When the most recent period in the market has been stable, we can break down the market action into a trend component and a cyclical component. That break down can give us worthwhile clues as to when we want to trade with market action and when we want to fade it. You keep doing what has worked unless and until you get concrete evidence that volumes and volatility are changing significantly. During stable periods, it is much more profitable to be trading the patterns that show up in markets in the current regime than to hope for change and try to crystal ball when regimes will end.

Monday, January 23, 2017

There are three warning signs of failure among traders I've observed:1) Letting Political Preferences Color Investment and Trading Views: Barry Ritholtz makes an excellent point in his recent article. You may love the new President; you may dislike him; you may have doubts and concerns about his administration; you may have hopes and aspirations for his term in office. Politics is a poor predictor of market performance, as Barry illustrates. 2) Becoming Fixed in a Bullish or Bearish Stance: There are reasons to take a directional view at various times, but chronically taking one stance or another is a sign of imposing one's views on markets, rather than following the flows of supply and demand. I've worked in places where analogies to such market crashes as 1987 and 2008 are regularly trotted out and used to justify bearish stances. Invariably, those have been after times of weakness, preceding market rises.

3) Becoming Locked Onto a Single Time Frame: Traders often have favorite indicators or statistics. They latch onto those and view markets solely through those prisms. What looks like an overbought market in one time frame may be the start of a rise in a longer one. What appears to be a range bound market at one time period might be a pause in a longer-term trend. As in much of life, we are most likely to overreact to events when we fail to place them in context.These three warning signs are problematic, because they suggest that the trader is not truly evidence-based. An evidence-based trader approaches markets the way a juror ideally approaches a trial: with an open mind, weighing each piece of evidence, and arriving at a judgment based upon the evidence. The competent juror looks for facts and only makes their mind up when the facts line up. It's not a bad model for traders.

Sunday, January 22, 2017

If you check out the recent market review from Jeff Miller, you'll notice something interesting: U.S. economic data are quite strong. The Philly Fed index of business conditions, for example, has been rising strongly, exceeding expectations. Jobless claims are at unusually low levels, the opposite of what we'd expect if we were on the verge of recession. Interestingly, my model of stock market sentiment has been on the bearish side over the past week. That model looks at the ratio of put option activity to call option activity for all listed stocks (not indexes) and exchanges. The regression model takes out the overall impact of implied volatility for the market overall and recent price change, so that we can see--for a given level of $VIX and recent price change--whether market participants lean bullishly or bearishly. When they are relatively bullish (model below zero), the next ten days in SPY, going back to 2014, have averaged a loss of -.15%. When traders are relatively bearish (model above zero), the next ten days in SPY have averaged a gain of +.69%.The stock market has been correcting in recent weeks, which can be seen in the above graphic that tracks intermediate-term market strength. This measure is derived from the number of SPX 500 shares that make fresh 5, 20, and 100-day new highs versus lows. (Raw data from Index Indicators). What we've been seeing is a diminishing number of shares making new highs. On an intermediate-term basis, we've also seen some expansion in the number of stocks making new lows. For example, across all exchanges, fresh one-month new lows have outnumbered new highs for the past four trading sessions.

With respect to the major averages, it's been a relatively flat correction to this point, with more sector rotation than outright weakness. We're trading at about the same level in SPY as we were in mid December. My ensemble model, which combines individual models related to such factors as buying/selling pressure; volatility; sentiment; and breadth, has been leaning bearish for the past week. That leaves me open to the possibility of further correction, as the model anticipates price change two weeks forward. The rotational nature of this correction, the strength in economic data, and the strength of the post-election rise (which saw a meaningful expansion in the number of stocks participating on the upside) all lead me to believe that any such weakness will indeed be part of a correction and not an outright bear market.

Should rates continue to rise as part of a gradual normalization of Fed policy in response to a firmer economy and rising inflation, we could see a movement out of fixed income and into the stock market. That would especially be the case if the tailwinds of coming economic stimulus look to outweigh headwinds that could come from restrictive trade policies. If we, indeed, were to get further correction in stocks and even more bearishness from sentiment data (as anticipated by the trading model), the investor in me would be looking to scoop up some values.

Saturday, January 21, 2017

In his book Personal Causation, Richard De Charms outlined the difference between people who experience themselves as origins versus pawns. Origins are those that can initiate chosen action; they have impact on the world. Pawns are those to whom things happen. They are relatively powerless and passive. A similar distinction in psychology is internal versus external locus of control: the degree to which we perceive life outcomes as within or outside of our control.All of us experience bad things in life. Some of us experience really bad things. We either move on as survivors or victims. Survivors live their lives as origins; victims as pawns. Survivors wrest control of their futures; victims experience life as outside their control.The more someone has actually been victimized, the more important it is to not live life as a victim. I've worked with those who have been raped, sexually assaulted, and physically abused. They move on successfully as survivors, not as victims. They overcome by refusing to remain victims. They find their voices and forge meaningful paths of action. I once worked with a medical student who had been horribly abused. She lived every day refusing to succumb to painful memories and instead dedicating herself to healing. What a beautiful transformation: her ability to survive was an inspiration to many others.I can honestly say that I've never met a successful, productive person who fundamentally experienced themselves as a victim. Successful, productive people originate; victims suffer. The medical student became a survivor by using her suffering to originate healthy outcomes for others. The trader who endlessly complains of unfair, rigged, and manipulated markets is a psychological victim. Such traders cannot originate success as long as they experience themselves as pawns.The problem with political correctness (see recent perspectives here and here) is not a matter of left- or right-wing politics. The problem with political correctness is that it enshrines psychological victimhood. Survivors do battle; they don't seek "safe space" refuge from every perceived "microaggression". Political correctness, at its worst, is virtue signaling via victimhood: an attempt to establish one's status--and especially to diminish the status of others--by embracing pawn status. The goal is not to find one's individual, authentic voice, but to extinguish the voices of others--the precise opposite of diversity.

At companies I've worked for, I've heard quite a few managers criticize political correctness. Ironically, many of these managers work for businesses in which questioning management decisions is taken as a sign of disloyalty and lack of teamwork ethic. Quite a few employees have been referred to me over the years because they spoke out. My job, apparently, was to help those employees build their "positive psychology" and become better "team players". Political correctness shuts down criticism, whether it originates from one side of the political spectrum or another. We cannot be origins if we are punished for our voices. Per Voltaire (and Snog's Ballad), we are ruled by those we can't criticize, whether the punishers are governments, corporate overlords, or politically correct thought police.

No one will respect you as a trader for the number of times you lose money, or the ways you lose money. They respect you for getting up after getting knocked down, learning from experience, finding your strengths, and growing and persevering. If you re-read the Market Wizards texts, you'll appreciate how often successful traders experience harrowing losses. They are in the texts because they moved forward as survivors and originators who transcended defeat, not as victims.

Life is far too short to be lived in pawnhood. What in your life--and in your trading--are you originating?

Friday, January 20, 2017

A very helpful post from Bella at SMB asks the question of what you would tell your younger trading self. What lessons have you learned that you would have wanted your beginner self to know about?

One of the important ones Bella discusses is being a sponge. He makes a great observation: the best traders he works with talk like him. Not because he has all the answers, but because they've internalized the learning he shares as a mentor. Great lesson for our younger self: find a mentor and absorb their teaching. All performance learning is apprenticeship.A second important lesson I would impart to my younger trading self is repair it, before you repeat it. Keep detailed score of your trading process and results and learn, learn, learn from mistakes and successes. Spend more time repairing and less time staring at screens, fearful of missing the next trade. Missing your mindset errors will cost you much more in the long run than missing a trade entry.A third lesson is illustrated by the metal band Judas Priest. They took a great folk song from Joan Baez and re-interpreted it, giving it an entirely different sound. Over 20 years later, the band had matured and gave the song yet another voice. That's what great artists and traders do: they innovate, and they mature. I'd want my younger self to be less interested in consensus ideas and approaches and more focused on finding his own voice. Absorb the lessons of mentors and then use your experience to make those lessons your own.Absorb learning from those who have blazed a path ahead of you. Relentlessly work on yourself to improve weak areas and build on strengths. Then, armed with learning, experience, and self-mastery, don't be afraid to blaze your own path and become one of those mentors that will inspire and educate others. Expertise is a developmental process...make sure you're continually developing.Further Reading: Developing the Right Trading Routines
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Thursday, January 19, 2017

Successful traders lay very deep foundations.What does that mean?It means that they find multiple ways to win and develop experience and expertise in each of those areas.Think of any successful company: a soft drink company, an automobile manufacturer, an electronics maker. All have many products that they sell. Each one is a potential profit center, and the combination of multiple profit centers creates a deep foundation for the business. If one year SUVs don't sell, the auto manufacturer can sell fuel-efficient sedans or sports cars. Multiple ways to win means that you can win even when some of your strategies don't.The successful money manager creates a portfolio of relatively independent trades, each of which possesses positive expected value. One idea might be to be long the US dollar because of interest rate trends and central bank policies in the US versus other countries. Another idea might be to be long mega-cap stocks and short micro caps because of the anticipated impact of fiscal stimulus and tax credits. Still another idea might be to buy agricultural commodities because of a change in long range weather forecasts from the best meteorologists. Such a portfolio has multiple ways to win...if one idea doesn't work out, the others can.Similarly, the active daytrader may trade a reversal pattern with active stocks near the open and then trade a surprise earnings report later in the day with a single stocks and then trade a trending stock into the close. Over the course of the day, the active trader has placed many trades, each with an edge. It is the serial pursuit of opportunity that creates diversification each day. One trade can fail and the day can still be profitable.What that means is that successful traders must be able to innovate at two levels. First, they must find new ideas and fresh opportunities. Second, they must cultivate new sources of ideas and opportunity. The first involves exploiting the edges we already possess; the second involves identifying additional edges. The successful trader is never static, never dependent on one type of market condition to make a living. Just as research and development is the lifeblood of technology and pharmaceutical companies, it is the source of long-term success for traders.When successful traders aren't trading, they are researching, developing, and innovating. When unsuccessful traders aren't trading, they're staring at screens and forcing trades. There is nothing better for trading psychology than being at the cutting edge of a growing business.

Wednesday, January 18, 2017

Here's an idea to add to your keeping of a trading journal:Instead of simply recounting what you did right and wrong and what you'd like to do going forward, grade yourself on your consistency. Your consistency grade requires a list of your best practices. These are the things you do when you're at your best. They can be lifestyle choices, such as how you eat or exercise; they can be best trading practices; they can be best practices in terms of your romantic and family relationships. In other words, the list consists of the things that define you at your best.Your consistency grade represents a frequency count of the number of days in the past week in which you have enacted that best practice.When our two youngest children were very young, we created "sticker charts" for them. Each day they cleaned their room, played well together, and ate well, they received a sticker. If they received stickers every day of the week, they could cash those in for a toy or fun thing to shop for over the weekend. The key to the exercise was the requirement that stickers had to be earned every day. That rewarded not just good behavior, but consistency in good behavior. It's that consistency that builds positive habit patterns.Imagine an adult equivalent of the sticker chart: If you can check the boxes on your best practices list every day, you arrange a reward experience on the weekend. Perhaps it's a reward experience with someone you love, giving an extra incentive to achieve consistency. Most traders are achievement oriented. If they set up this kind of system and make it public (we hung the sticker charts on the refrigerator), they will want to check the boxes. They will not want to fall short of a goal they commit to.The hard part in making changes is getting to that place in which desired behaviors become routine behaviors. It's easy to fall back into old patterns before the new ones take root. Structuring your work on yourself--and on your trading--as work on consistency helps you make that transition, building those new, positive habits one day at a time.Further Reading: Turning Success Into a Habit
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Tuesday, January 17, 2017

Here's an admittedly unusual chart taken from last week's stock market action. The red lines represent the amount of total upticks in the market on a one-minute basis. I use this as a measure of buying pressure. The blue line represents one-minute closing prices in SPY. The chart is arranged so that the week's high price for SPY is at the left and moves toward the low price at the right. Time is not a variable here. We are looking at buying pressure at each price level of SPY during the past week.What we see is that buyers were quite active as we crossed the 227 level in SPY. We also see very low levels of buying and in fact net negative buying from approximately 226.75 to 226.87.It's a way of smoking out where the buyers and sellers are located. I've found this to be a very useful way of thinking about "support" and "resistance"--and an especially effective way of identifying points where fresh buying or selling are entering the market. It's also an example of how looking at market data in new ways can provide fresh perspectives that aid market understanding. If a price level has held sellers this past week but cannot hold sellers early this week, it's a very useful indication of a shift in supply vs. demand.I find my most effective trading captures an understanding of who is in the market and what they've been doing. Too many traders attempt to forecast what prices *will* do before they truly understand what they've been doing. The market is an auction, and you're watching the behavior of buyers and sellers to determine whether the price of the goods is likely to rise or fall. It's amazing what we can see when we place market behavior in proper context.Further Reading: The Most Powerful Step We Can Take Toward Becoming Solution Focused
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Monday, January 16, 2017

Traders are typically inundated with information--from charts and data feeds, chat, financial media, social media--but obtaining knowledge (not to mention wisdom!) requires some active filtering. The challenge is to be open to new sources of perspective, but not so open that everything becomes a blur. I would much prefer to deeply ponder five excellent sources of knowledge than skim fifty. Indeed, it's the proliferation of information--and our desire to assimilate it all--that often prevents us from obtaining true knowledge and wisdom.

A recent feature from Feedspot highlights 100 top blogs and websites associated with the stock market. These have been ranked as a function of site traffic and social media followings. TraderFeed is on the list, as are a number of news and trading-related sites. A great exercise would be to scan the list and find one source of information that can truly provide knowledge for your trading. While not all 100 will be relevant to every trader and investor, the odds are good that at least one can provide new ideas and perspectives.Creativity begins with new inputs: we're most likely to achieve new insights when we look at new things and contemplate old things in new ways. The challenge is finding the information most likely to provide us with actionable knowledge. The list of 100 sites is a good place to start. Further Reading: Some of My Favorite Financial Websites for Developing Traders
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Sunday, January 15, 2017

I have to say, in the many years in which I've participated in interviews, I've never encountered one as detailed and well-prepared as Barry Ritholtz's recent interview of me on Bloomberg Radio. He sent me questions in advance, updated those questions before the interview, and then came up with additional questions during the interview that revealed his prior thinking on the topics. Barry's podcast series, Masters in Business, has become an impressive body of work, including interviews with such authors as Michael Lewis, Daniel Kahneman, and Philip Tetlock. One of the major themes of the recent interview was the role and importance of positive psychology for the discipline of trading psychology. Positive psychology grew out of the early work of Abraham Maslow and the subsequent research of Martin Seligman and others. It is the study of human strengths and competencies, as opposed to the study of psychological disorders. An excellent curated list of positive psychology readings can be found here.

In a performance field such as trading and investing in financial markets, it is the leveraging of these positive attributes that distinguishes success. Solution-focused work turns traditional counseling, therapy, and coaching on its head by intensively studying our successes--and then building upon those. The Trading Psychology 2.0 that I describe in my recent book is a view of trading performance that highlights such strengths as adaptability, creativity, and the continual evolution of best practices into best processes. Those topics were barely mentioned in trading books when I first began working with participants in financial markets almost two decades ago. If you have goals and a vision for yourself, the best way to reach those is to find the ways in which you are already moving toward those ideals in some ways, at some times. There are patterns connecting your smaller successes that can become the framework for larger successes. We are already the people we wish to become, but often only occasionally and inconsistently. It is our moments of best performance that hold the key to the achievement of our greatest dreams.Thanks again to Barry and the Bloomberg team for the opportunity to exchange ideas. The podcast series is an invaluable resource for traders and investors.

Saturday, January 14, 2017

Here's a very simple rule that distinguishes good traders from poor ones:Good traders trade poorly at times. When they do, they pause from trading, reassess the market and themselves, and don't return to trading until they're in a different mode. That different mode could be a different state of understanding; it could be a different emotional, cognitive, and physical mode--often it's all the above. When good traders trade poorly, they make changes before placing additional capital at risk. Pausing from trading is an essential part of their success. It returns them to their best practices.Poor traders also trade poorly at times. When they do, they continue trading, and they compound their mistakes. They never achieve a different mode, because they're so focused on markets that they never observe themselves. When poor traders trade poorly, they place additional capital at risk before they can make changes. That further trading is essential to their failure. It keeps them from implementing best practices.To determine a trader's skill, watch what they do when they are not trading. How well do they research and reassess markets? How deeply do they reflect and observe themselves? It is in life's pauses that we have an opportunity to change direction. Without powerful pauses, nothing can change.Further Reading: Three Best Practices of Trading
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Friday, January 13, 2017

Here's a very important psychological principle: When you want to make a change, clearly identify your ideal self--the person you would like to become--and make a conscious effort to be that person in some way, in some measure every single day.We expand our identity by taking on roles and, over time, having those roles become part of us. When I met my wife, she had three children by a prior marriage. I had never been in a father-like role in the past. By taking on some (but far from all) of those responsibilities day after day, I gradually internalized the sense of being a father. When we had two more children, I stepped into my responsibilities naturally and gladly.Identity is something we internalize over time, and the feedback we receive from others when we're in a new role is an important part of that internalization. Our life experience is constantly mirrored to us in our social interactions and that becomes part of who we are.One change that many traders want to make is expanding their trading size and risk taking. They have been trading small and prudently as they develop, but now is the time to take greater risk and pursue meaningful rewards. How can traders make that transition?We become bigger traders by gradually trading bigger: by assuming that role each day. In gradually bumping up the size of our positions, we gradually internalize the sense of being a bigger trader. The gradual increases ensure that the resulting volatility of our P/L doesn't throw us for a loop, but are meaningful enough that we experience ourselves as growing.We never talk ourselves into change. Change is the internalization of consistent action. When we assume a role, we potentially expand our identity. Be the person you want to become in small measure every day, and before long, you'll experience the world as that ideal person.Further Reading: Five Keys to Making Life Changes
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Thursday, January 12, 2017

In a recent post, Adam Grimes offers a number of helpful thoughts and advice for developing traders. He makes the very valuable point that many of the psychological challenges of trading resolve themselves once basic, fundamental components of trading are properly addressed.

I'd like to add an observation to Adam's excellent list of must-do's for evolving traders. The observation was inspired by a group coaching exercise I performed yesterday with the developing traders at SMB. They came to my session probably expecting me to deliver a talk on a psychology-related topic. Instead, I began by going around the room asking each attendee to name the one goal they were working on in that day's trading. To their credit, the traders were able to quickly articulate what they were attempting to accomplish.

My observation is that the rate of development in a trader critically hinges upon: 1) keeping score with one's trading; 2) using score-keeping to identify clear aspects of trading to work on; and 3) the manner in which one actually works on those goals. This third component turns out to be particularly important.A good, diligent trader will keep track of P/L of trades, identify good and bad trades, and perhaps write in a journal what they did right and wrong and how they want to improve. That is great. Consider, however, the trader that takes the following additional steps:a) Discusses good and bad trades with a coach, mentor, or colleague and gathers additional perspectives re: things to work on;b) Films the trading session and actively reviews each trading day, focusing on specific areas where decisions were made and could have been made and noting what to look for in the future to take the right actions;

c) Uses results to improve screening for trade selection, including writing scripts that automate screens and identify stocks trading with similar patterns.

Those additional steps accomplish two things. First, they allow the trader to process learning lessons more deeply, because those lessons are processed via multiple modalities: through discussion, active observation, and automated analysis. When we learn something in multiple ways--think of learning to drive a car by reading and memorizing road signs and rules; practicing on a driving simulator; and going out on the road with a driving instructor--our learning is most likely to stick.The second benefit of these added steps is that they place the trader in a very active learning mode. The trader who films the session is then reviewing the film, pausing it at key points, writing down observations, and cementing patterns to be acted upon--no different from athletes who watch game film as preparation for practice and upcoming games. The active and interactive learning keeps the trader highly engaged and focused and thus more likely to take in the lessons learned.

Learning more deeply in multiple modalities; learning more actively by doing and not just observing--these enrich the development process and accelerate the learning curve. One or more traders in my meeting engaged in one or more of these best learning practices. Imagine being in a community of traders, each of whom is learning deeply and actively.

The process of learning is every bit as important to development as the lessons being learned.

Wednesday, January 11, 2017

In the previous post, I proposed a scheme for reading market cycles, by breaking those cycles into phases based upon market activity. Trading market cycles requires a kind of creative opportunism described by Gehry. The materials on the table are characteristics of market behavior. When trading well, we are arranging those in a fashion that enables us to capture solid reward-to-risk relationships.A cycle-based site for stock and ETF trading that quantifies market cycles and makes buy and sell recommendations is StockSpotter. The site makes many recommendations--more than the average trader would take in a day. So they simulate performance by taking very many random groups of four recommendations (Monte Carlo simulation) to show the range of likely trading outcomes from following those picks. It's one of the more elegant demonstrations of edge that I've seen from a market service. The opportunism comes when we take other criteria for buying or selling, such as our fundamental analysis of a company or our view of the entire market, and marry those to the site's recommendations. What we're trying to do with this kind of opportunism is join two or more independent sources of edge, so as to maximize the probability of success.

A different kind of opportunism might look at separate overbought/oversold measures on two or more different time frames. For example, I'll look at the upticks/downticks in the market as a very short-term measure of overbought/oversold and an oscillator of price change to capture a medium time frame. When we are topping and dropping, we'll see the measures peak at equal or successively lower price levels: the buyers still move the market, but cannot move it higher over time. When we are bottoming and rising, we'll see the measures trough at equal or successively higher price levels. In opportunistically aligning the time frames and market behavior, we can find solid risk/reward ways to exploit market cycles.Still another form of opportunism for daytraders involves tracking order flow--seeing when bids or offers are holding particular levels--and joining that information to a broader view on trend/direction. For instance, if we see recurring bids being hit at a given price level where that level holds, we might join the offer if we see that the bigger picture for the stock is higher.

It is this lining up of market behavior that creates some of the best trades. Waiting for the lining up requires patience and perspective. A great deal of productive trading time is spent not trading, but actively watching for those occasions when one source of edge falls into place with another--and then pouncing on those opportunities with meaningful risk-taking.

Tuesday, January 10, 2017

I find it helpful to think in terms of market cycles, rather than trends. A cycle consists of both trending and non-trending components. Understanding where we're at in cycles helps us identify whether we want to be going with strength or weakness or whether we want to fade these. Once we think in cycles, it's silly to identify ourselves as trend traders or counter-trend traders. Our job is to profit from the various phases of market cycles, not try to make market activity fit our predetermined trading preference.Cycles are like snowflakes: no two are identical and yet all have a similar structure. Let's review the phases of a market cycle:1) Market Momentum Bottom - Here is where we wash out on elevated volume, with a maximum number of stocks registering fresh new lows. Volatility is high and correlation is high, as the great majority of stocks and sectors are participating in the decline. An example of a market momentum low was January 20, 2016, when we dropped on high volume with over 2600 stocks across all exchanges registering fresh three-month lows.2) Market Bottoming - The extreme selling brings in value buyers and we get a sharp bounce from the market lows, followed by further attempts at selling. At major market lows, this bottoming process can occur over a period of weeks or more; at intermediate lows, it may occur over subsequent days. An example of a bottoming process was the bounce into the beginning of February, 2016 followed by a decline to new closing price lows on February 11th. Only 1353 stocks made fresh three-month lows at that time, showing that selling pressure was having difficulty moving the great majority of shares lower.3) Bull Momentum Phase - With the inability of sellers to move the majority of stocks lower, value buyers return with a vengeance aided by short-covering and that moves the market steadily higher. Volume and volatility are still high, with the vast majority of stocks lifted off their lows. In this phase, we often look for pullbacks but get none of great magnitude, as momentum enables strength to follow from strength. A good example of a momentum phase was the sharp move of stocks higher from mid-February, 2016 through much of March and early April.4) Bull Topping Phase - Here is where higher prices get to the point where the market is no longer attractive to value participants and bulls are relatively loaded up. This results in a drop of volume and relatively low levels of volatility. Correlations move lower as some sectors and stocks continue strong, while others begin to lag. Late in a topping phase, we can see the number of stocks making fresh short-term lows expand, even as the overall market averages are near their highs. A short topping phase occurred from mid-April, 2016 through early June. Over that time, price moved higher, but new three-month highs dropped from 1113 to 818.5) Bear Momentum Phase - The inability of buyers to push the market to new highs attracts the participation of sellers and volume and volatility once again pick up. The market can remain oversold for a while, as bulls exit their positions and shorts are emboldened. Correlations rise, and we move toward a market momentum bottom. The market demonstrated an intermediate bear momentum phase from early June, 2016 to late June. At that bottom, we did not see an elaborated bottoming process. When a pullback occurred, it was from a higher price point and resulted in a higher price low. This led to a quick rally higher into August.As a rule, the longer the bear market phase and bottoming processes, the longer the subsequent rally. The longer the bull topping phase, the more extreme the subsequent bear phase. When more market participants are trapped short or long, the unwinds tend to be greater.Cycle structure can provide us with a road map for gauging where we stand with respect to "overbought" and "oversold" markets and the likelihood that strength or weakness will continue or reverse. I use cycles less for predicting markets than understanding them. Knowing where we're at in a market cycle helps us avoid chasing markets at the wrong time and also helps us avoid standing aside during the market's periods of momentum. Most of the indicators I track are ways of gauging day to day strength and weakness and updating where we stand in terms of cycle structure.At present, we see volume and volatility at relatively low levels and small cap shares underperforming large caps. That has contributed to a rise in the number of stocks registering fresh short-term lows. For example, on Monday we had 520 stocks across all exchanges make new monthly highs, but 694 register fresh monthly lows. Technology shares have made new highs, but many sectors remain below their peaks. All of that raises the odds that we're at a relatively late, topping period in the recent bull cycle.Further Reading: Relative Volume and Links to the Indicators I Follow
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About Me

Author of The Psychology of Trading (Wiley, 2003), Enhancing Trader Performance (Wiley, 2006), The Daily Trading Coach (Wiley, 2009), and Trading Psychology 2.0 (Wiley, 2015) with an interest in using historical patterns in markets to find a trading edge. As a performance coach for portfolio managers and traders at financial organizations, I am also interested in performance enhancement among traders, drawing upon research from expert performers in various fields. I took a leave from blogging starting May, 2010 due to my role at a global macro hedge fund. Blogging resumed in February, 2014, along with regular posting to Twitter and StockTwits (@steenbab). I teach brief therapy as Clinical Associate Professor at SUNY Upstate in Syracuse, with a particular emphasis of solution-focused "therapies for the mentally well". Co-editor of The Art and Science of Brief Psychotherapies (American Psychiatric Press, 2012). I don't offer coaching for individual traders, but welcome questions and comments at steenbab at aol dot com.